Over the weekend, I received four calls from producers. Unfortunately, I believe they are indicative of the state of the state of today’s agricultural economy. The farms represented by these four producers are a combination of crop and livestock operations. The economic reset has been in full swing for several months, however, now it is really starting to demand attention. Regardless of crop or livestock prices, the global economic forces of the U.S. strong dollar and weaker demand continue to suppress revenues. Coupled with elevated fixed and variable costs, lower commodity prices and global uncertainty, many producers are pressed to face negative margins or at best, a breakeven point in income. The reality of today’s economic environment places immense pressure on farm families. As those that called me, many want to cash in before large equity drops.
In each of these four cases, the business exhibited very strong equity levels, above 65 to 70 percent. However, the problematic issue is turning that equity into liquid financial assets with which meet bills and service debt obligations. As one of the producers said to me, “Equity doesn’t pay the bills, but good old-fashioned cash does!”
The questions on each of these producers’ minds were whether they should continue in business, liquidate, or partially liquidate in pursuit of some other diversification. In one case, the operation involves brothers between 50 and 70 years of age. Two of the operations are managed by couples in their mid-40s and the last is a single producer, approximately 50 years of age. Clearly, none is near retirement age, yet each is considering a major career and life change.
First, I commended their decision to seek an outside perspective. Often, a third party can be an objective facilitator to help determine future options. Each individual involved must develop short, intermediate and long-term goals. This includes not only business goals, but objectives for family and personal lives, as well. Developing these goals will help map out the possible routes for future direction.
When considering the future of your business, another component to examine is tax implications. While equity does not pay the bills, equity can and will result in possible tax burdens with partial or total liquidation of the business. This is because many of the assets have been depreciated resulting in zero or small tax basis, resulting in deferred taxes.
The next step in your analysis is to total the operating losses and determine how quickly your obligations will erode your equity. Specifically, conduct a burn rate on working capital and liquid assets. This rate should be calculated before converting any net worth into cash to meet financial obligations.
The economic reset is still in its beginning stages. Tough questions will continue to emerge which could weigh heavily on finances, economics and emotions. Do not allow vanity to delay you in seeking support, advice and options. An economic reset can bring tremendous pressure but can also be the catalyst to reinvent a more efficient, productive business. Thoroughly analyze your current position and goals in order to make informed decisions about all your future opportunities.
P.S. One thing a third-party facilitator may do is raise the emotions and even tempers of family members and others involved. Outside facilitators approach the situation objectively and will force resolution on issues that may be uncomfortable. This is not a bad thing, but be prepared!
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